Adapt or Perish: How COVID Is Changing the Cruise Industry

2020 should be a record year for the cruise industry with 32 million expected passengers, almost double the 2009 numbers of 17.8 million. But unfortunately, the world was hit by the novel coronavirus, and things went downhill, putting the cruise industry in an unprecedented crisis.

As per research: 54 reported infected ships and 2.592 ill crew members and passengers worldwide. 65 people died aboard cruise ships as matters spiraled out of control. Following this, ships were placed on stasis one by one, crewed by minimum possible staff. The now superfluous staff members were sent home on chartered planes, mass bookings, and even aboard cruise ships while the world struggled with convoluted and sometimes closed border crossings.

The cruise industry is remarkably resilient and has endured and overcome many challenges. The new coronavirus, however, has been different. Governments issued advisories against the cruise industry, with some experts calling ships viral incubators and that the industry needs to be shut down. Dr. Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases, issued a direct statement of avoiding cruises on an NBC telecast. There have been indicative signs of industry slowdown, from the prediction of industry experts to shipbreaking yards receiving an increasing number of cruise ships.

Building up of the storm

On March 4th, 2020, the German Federal Government stated an increased risk of infection aboard cruise ships. On March 14th, the CDC of the US issued a no sail order for 30 days. Ships were left fully staffed by the liners, with the intent of salvaging the remaining summer season. On April 9th, 2020, the CDC extended this order for 100 days, prompting drastic and quick revaluation by the shipping industries to survive, leading to loitering ships with minimal staff. The Foreign Commonwealth Office of Britain also recommended no traveling on cruises on July 9th, 2020.

Spreader events aboard the ships started to surface, such as the infamous DIAMOND PRINCESS. Crew unpreparedness led to the mingling of infected and healthy passengers, resulting in more than 700 crew and passengers testing positive and the death of 8. Another case, the RUBY PRINCESS, where 2.700 passengers were released without quarantine or tests, later resulted in more than 900 infected and 28 dead. Such events saturated the media, causing an effect similar to what the 9/11 attacks had on the airline industry; causing unpleasant associations with ships in the minds of people.

National governments around the world put the safety of their citizens above foreign nationals. Ports refused to accept cruise ships. Australia banned cruise ships from arriving on March 15th, 2020, and on March 27th, the country directed all foreign vessels to leave the ports.

In May 2020 Canadian Minister of Transport stated that cruise ships with more than 100 people would not be allowed in Canadian waters until October 31st, later extended to February 28th, 2022. Singapore, New Zealand, and Seychelles ceased port calls for cruise ships. The United States Coast Guard also placed restrictions on treating sick passengers or crew and evacuating them to their home countries.

Caught in the storm

With the government issuing travel bans and border closures, the cruise industry found itself caught in an unprecedented storm. Cruise companies had a fall in revenue and were now subjected to additional cost of repatriation of crew and passengers.

The revenue generation model aboard cruise ships involves 62% of the revenue coming from ticket sales. The remaining 38% comes from onboard purchases such as drinks, casinos, spas, art auctions, and shore excursions. So the largest three cruise organizations reported $336, $257, and $118 million in the first quarter of 2019.

This model becomes effectively defunct in a dangerous pandemic, placing cruise lines in a precarious situation. The graph below shows how the port calls almost fell to zero in 2020-21, and with no revenue, the cruise companies were forced to burn cash for maintaining their floating assets.

The cash burn forced many cruise companies to get rid of their assets, and there was a rise in the number of ships landing at the shipwreck yards of India, Bangladesh, and Pakistan.

Fighting the covid-induced crisis

The cruise lines implemented several strategies against the quickly mounting challenges to varying degrees of success. They applied for financial bailout packages, stating they were essential to the economy. They applied for financial bailout packages. Cruise lines registered as companies in places where tax havens had loose labor laws, causing US authorities to not sympathize with their plight.

In addition to preserving cash and raising a lot of capital, they had to restructure their debts and obligations. They went to banks, lenders, export credit rating agencies who supported their ship-building initiatives and renegotiated expenditures. Carnival raised upwards of $6 billion by high-yield debts, equity, and bonds.

Given the volatile nature of the cruise industry, cruise lines are not entirely unprepared. When the economy is downward, the first thing to be sacrificed is vacation. So cruise lines have considerable sums stored as war chests.

In April 2020, the Norwegian had $2,4 billion in savings, the Royal Caribbean had $3 billion, and Carnival Corp. had $8.2 billion stored away as savings. The business required a certain amount per month to survive, dubbed as “burn rate” in industry jargon.

As the lockdown’s long-term nature became apparent, laying off the staff onboard and on the shore was the first easy choice to reduce the burn rate. However, ships themselves are harder to dispose of. The vessels keep floating in the seas or are sold for scrap to shipbreaking yards.

Cruises companies relied on vaccination and started services in areas having high vaccinations. Royal Caribbean announced a cruise from Israel, one of the countries with the fastest vaccination campaigns globally. In addition, instead of the cruise routes being in the Mediterranean, they sail along the American coast, another country pursuing a rapid vaccination campaign.

Cruise lines also approach customers with vouchers and credits (120% – 125% of the sum) instead of a cash refund. They have achieved considerable success, signalizing resiliency of demand. According to a UBS bank report dated March 31st, 2020, around 76% of passengers whose trips were canceled opted for future credit over a refund.

Health protocols are being ramped up. To rehabilitate their image Carnival has offered the service of their ships as mobile hospitals. New cruise ships are entering service, such as the Virgin voyages’ SCARLET LADY. Another new avenue being pursued is the prospect of smaller cruises. Smaller-scale cruise ships offer itineraries on rivers, such as the new Viking cruise route on the Mississippi River.

Auxiliary engines are mainly used for power production onboard, and support the main propulsion engine. Boilers are used for ship propulsion primarily.

Shipbreaking: The Last Chapter of a Cruise Liner

Standing up in the post covid world

While the trend would indicate that cruises were poised to make a resurgence, there have been certain new worrying developments as of late. On January 7th, 2022, all the cruise ships on the US waters reported coronavirus on board. This is particularly worrying as many infected members were fully vaccinated and had even received a booster dose.

The Koningsdam of Holland America Lines returned to San Diego after being turned away from the port of Puerto Vallarta due to a small coronavirus outbreak. CARNIVAL FREEDOM was denied entry to Bonaire and Aruba after an undisclosed number of individuals aboard were infected. Royal Caribbean’s ODYSSEY OF THE SEA was forced to return after one day on the sea to Fort Lauderdale.

The CDC has launched an investigation, and the results would indicate the course ahead. At the same time, CDC has also given autonomy to the cruises regarding covid screening; in the spirit of economic lenience. This could potentially cause cruise lines to skirt the law.

This has brought an all too familiar pattern back to the fore. Again, the cruise lines may choose to turtle up and survive, but a chain is only as strong as its weakest link. The smaller economies on the ports of call are much more sensitive and may not survive.

However, cruise demand seems to be on the rise. Greg Lee of Goldman Sachs’ Investment Banking Division states their clients claim that there is pent-up demand, and they can fill up ships to capacity if the regulatory agencies were to cooperate. A recent survey from CLIA indicated 82% of cruisers favored booking a cruise for their next vacation. Cruisecritic.com survey suggests that 75% of 4.600 cruise passengers reported they would cruise post the pandemic.

The general sentiment regarding cruising is changing. Governments are giving nudges to tourism if only to support the economy. The recent WHO statement of a possible end of covid insight is also positive news, providing hope to a quick rally of the cruise industry.

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